Financial Due Diligence (FDD)
Financial due diligence involves detailed analysis of accounting as well as other business issues of a target company. Besides the profound analysis of the provided data, financial due diligence is supported by the interviews with the top management. The aim of financial due diligence is to look behind the financial information provided by the target company and help the buyer obtain an understanding about the profitability of the target company. This understanding will serve as the basis for forecasting future sales and for the further valuation of the company.
The reasons for ordering financial due diligence can be the following:
- Assessment of the financial numbers on which the target offer is based
- Identify deal breakers such as overestimation of assets, underestimation of liabilities, adequacy of provisions, potential costs, etc.
- Giving confidence in the target’s performance, and therefore future profits
- Decrease acquisition costs
The approach applied in financial due diligence is different from that used in audit. The purpose of financial due diligence is to explain why the numbers are what they are, - not just to put them to appropriate standards. The financial due diligence investigator asks questions and thoroughly examines the provided information until receiving the satisfactory answers to understand the essence of the accounts and how they influence the target’s profitability.
Why Ordering Financial Due Diligence?
Very few transactions are done without financial due diligence. Financial due diligence incorporates more procedures than just investigating accounting policies and information systems. Proper financial due diligence provides an understanding of profit formation which can be the basis for projections of future performance.
Why making financial due diligence at a company which already complies its accounting policies according to the International Accounting Standards and professional accountants have already done a lot of work to represent the financial information in comprehensive and comparable manner?
It is all about accounting itself. It is about uncertainties and distortions in accounting that influence objectitity of calculating profits. Accountants are often faced with the need to make subjective judgements when they represent the financial data such assets value presentation at a balance sheet or choosing (or using) depreciation policies - all can make a big difference to reported profitability.
Financial due diligence provides acqiurer wih an opportunity to test the underlyings assupmtions as to the tartget’s profitability and its future prospectives. It also allows to see how well the target fits the acquisition strategy and capable of making synergetic phenomenon. Finally FDD provides an opportunity to reassure there are no problems with the target big enough to break the deal; if not - find issues that will allow negotiating a lower price.
Local advisary is the key for effective financial due dilidence because, regardless of international accounting standards applications, there are still differences between the accounting policies used around the globe. Located in Ukraine we offer you our local accounting standards expertise in the FDD considerations besides our knwledge of internationally accepted accounting pronciples and practices.
At the start of a project we meet with our potential clients, discuss major FDD points, and shortly after we prepare the scope of work based on the client’s requirements. Then we agree terms, scope of work, timelines, reporting standards and fees.
Financial due diligence work relies greatly on the information provided by the target company including interviews with the key management. The FDD team plans the work in conjunction with the top management of the target company and other teams who might also work on the project (at the same time legal due diligence can be undertaken).
After reviewing working materials and setting the meetings schedule we discuss the target’s business plan, accounting philosophy under the target’s financial reporting and the key accounting clusters. The main operating business units of the target company will also be visited by the reporting accounting investigators in order to get an understanding of the operating and cultural environment of the company.
The heart of the due diligence process is the analysis of the financial data provided by the target company and the examination of the interview materials. We take detailed interview notes, look into the answers given, check them and make sure that they are consistent with the results of the business. We examine the received information in order to make sure we gained collective understanding of the target accounting philosophy and find the objective method to represent the profitability of the target company. Then we undertake forecast reviews making assessments of all assumptions under the business plan projections, reveal financial risks and other information that can influence the target’s profitability in the future.
On client’s request, we can includein the FDD’s scope of work.
We use flexible approach to deal with new essential information that might appear as we proceed with the project. This approach allows our clients to receive not only the assessment describe in the scope of work but also assessment and recommendations regarding the newly received information that was discovered within the process of the financial due diligence.
We summarize all the findings of our business investigation together with our assessment in a clear and concise report which is presented to our client at the end of the project.
Our consultants have strong and confident financial due diligence expertise – we have completed financial due diligences in the following industries: financial institutions, metallurgy, pharmacy, agriculture, real estate and transportation. We understand that investors do not pay advisers for information alone. What they really want are clear, well-founded opinion about the financial sustainability of the target and an assessment of financial risks. Suomin Consulting combines the professionalism and the level of service you will surely appreciate.
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